Chicken Littles like Spencer Hakiminian and Peter Schiff cry that tariffs will cause inflation and make American poor.
They are lying.
The sky is not falling.
Tariffs will not likely cause inflation. In fact, tariffs will probably lower the cost of living in the long run.
And we need to ask – inflation of what? Consumer goods? Why are the Chicken Littles not concerned about inflation of assets – houses and stocks – which is caused by the trade deficit? Who cares about the cost of disposable junk from China when ordinary Americans cannot afford to pay their rent or mortgages?
A Brief history of tariffs
To be clear: I do not have a crystal ball. No one does. The economy is a complex system – like a rainforest or coral reef – meaning that cause and effect often interact in emergent and unpredictable ways. The economy follows its own rules, rules that are impossible to know a priori.
This makes prediction impossible. The Chicken Littles cannot know that tariffs will cause inflation. Likewise, we cannot know that they will not. The best we can do is to forecast the likelihood of inflation, akin to how seismologists forecast earthquakes or meteorologists forecast the weather.
Our starting point is economic history.
To begin with, America had high tariffs for most of her history. Consider that George Washington’s first major piece of legislation was the Tariff Act of 1789. The Act was supported by Alexander Hamilton who penned his “Report on Manufactures” in 1791. The Founding Father’s logic was that tariffs were necessary to promote American manufacturing – to ween America from Europe’s teat.
Throughout the 19th century, America prospered under the American System, which was characterized by high tariffs. In fact, America had the highest average tariff rate in the world during this period – over 30%. By the 1880s America produced a quarter of the world’s industrial output, and by 1945 America produced half of everything on earth. America was the world’s factory.
Importantly, the cost of goods fell inexorably during this period. The “free trade brigade” would have you believe that tariffs raise the cost of living; however, this is directly refuted by over 150 years of economic history. It was not until the 1970s – when America began experimenting with economic globalism – that purchasing power began to stagnate.
This is very clearly visible when looking at median household spending on needs vs. wants. In the below graph, you can clearly see that the fraction of spending on wants increased until the 1980s and then began to decrease. Ordinary Americans have seen their purchasing power decline to a level not seen since the 1960s. This happened after America tore down the tariff walls.
As it turns out, “cheap” goods are not so cheap when you are unemployed.
In any case, we should also note that tariffs did not raise the cost of goods during President Trump’s first term – so why would we assume they will this time around? The Chicken Littles like Hakiminian and Schiff have terrible track records – although to be fair to Schiff, he did correctly predict nine of the last one recessions!
Tariffs for Dummies
In addition to economic history, the economic logic shows us that tariffs are unlikely to cause inflation. There are a few reasons for this.
First, a tariff is a tax imposed on imports. For example, a 25% tariff on steel would increase the price of steel coming from Canada or South Korea. However, that same tariff would not apply to steel that was made in America. In this way, tariffs are a completely avoidable tax. If you do not want to pay tariffs, buy American. Simple.
Not only do tariffs creative an incentive for consumers to buy American, but they also create an incentive for foreign producers to lower their costs. If countries like China or Mexico want access to America’s market – which they certainly will – then they will have to find a way to reduce their costs to balance out the tariff. Ultimately, lower production costs will benefit everyone.
At this stage, critics will argue that even if you buy American, you will still end up paying more. Why? American goods cost more to begin with, and without foreign competition, American businesses will price-gouge.
This may not be true in the short term, and is certainly false in the long term.
To begin with, America’s manufacturing industry is among the most productive in the world. That is, American factories produce more output per man hour than factories in China, Germany, or Mexico – a fact that was utterly lost on Peter Schiff in our recent debate. Given that productivity is what ultimately drives prices, America’s manufactured goods should also be among the cheapest in the world – and it is.
The problem is that sticker prices are skewed by economic externalities like foreign currency manipulation or predatory trade practices. Ironically, this results in efficient and cost-effective American factories being closed, while inefficient foreign factories – in places like Italy and Germany – remain open for business. Protecting American markets from abuse will help our domestic free market function more efficiently. This will lower costs as the market adjusts to the new normal.
Further, tariffs will reshore American factories and thereby increase domestic output. Manufacturing is an interesting industry, because prices are subject to increasing returns. That is, the more that we manufacture, the lower the price of each unit of production becomes. This is because capital costs are fixed, and the more we make, the more these costs are disbursed.
As such, we have good reason to believe that prices of American products will actually decrease if we impose tariffs. This will help offset anticipated short-term price increases while the market adjusts.
Finally, the only way to decrease prices in the long run is to increase productivity – to invent and implement new technology. The best catalyst for this is higher input cost, particularly labor costs. We can expect that companies who reshore their factories from places where labor is plentiful and cheap will be looking to invest in capital and technology that improves productivity. In the long run, this will drive invention and innovation, and lower the cost of goods – not just for Americans, but for everyone.
The world prospers when America prospers. Tariffs are an effective tool to rebalance America’s economy away from financial interests – moving money – and into productive investments. Tariffs will realign the economy toward building the future, rather than buying it.
Compared to what?
Many of the most aggressive Chicken Littles – like Hakiminian and Schiff – work in finance. This is unsurprising. Why?
Because the trade deficit causes inflation – not of goods but of assets and debts – the financial instruments that generate profit for the financial class. That is, Wall Street is the primary beneficiary of offshoring and the resulting trade deficit. There is big money in selling America for scrap.
How does this work?
America imports far more than it exports. This results in a trade deficit which we need to pay for. How do we do this? By selling assets and debts. As a result, the trade deficit directly contributes to the increase in prices – inflation – of American assets and debts.
For example, in 2024 foreigners bought an estimated $42 billion of residential real estate, $8 billion of agricultural land, and $12 billion worth of commercial real estate. This drives up real estate prices, locking our own young people out of the real estate market – denying them their share of the American Dream. Again, who cares if you save a dollar on a spatula when you cannot afford a house?
In addition to real estate, foreigners buy American businesses. As of June 2023, foreign investors own 17% of all American equities. Ownership of our businesses has dire consequences, such as giving foreign governments direct access to our technologies. This perpetuates the massive theft of American intellectual property, which costs hundreds of billions annually, and jeopardizes our national security.
Americans also trade debt. This is sort of like buying groceries on credit cards, except is occurring at the national level. For example, foreigners own some $8.67 trillion of U.S. Treasury securities, accounting for 24% of the public debt. Further, America’s corporate and household debt has ballooned since 1973 to the highest levels since World War II.
Debt is especially dangerous because we have to repay the principle and we pay interest. This inflates the cost of buying foreign products in a way that most economists fail to appreciate. Consider that America became a debtor nation in 2006 – for the first time since the Great Depression.
As a result, we are now paying over $150 billion in interest every year to foreign entities for the privilege of buying the products we should be building.
Chicken Littles on Wall Street opposes tariffs because consumer goods – things people want – may rise in price. In comparison, the absence of tariffs inflates the price of housing – something people need. From this, we can see that the Chicken Littles do not actually care about inflation.
Instead, they manipulate the American public to promote a trade policy that inflates the price of assets that they already own – real estate and stocks – at the expense of the livelihoods of ordinary Americans. They profit by selling America to the highest bidder.
This is why Wall Street hates tariffs – and this is why Main Street should love them.